"The singularly most bullish comment on gold we can recall..."
IF YOU'RE AT ALL tempted to Buy Gold or gold stocks, writes Dan Amoss for The Rude Awakening, don't resist the temptation.
Market focus has shifted almost completely to the size and impact of the US fiscal stimulus package currently under construction. Few are considering the consequences of such reckless spending, least of all how it will be paid for. The unspoken truth is that the Fed may eventually "monetize" it – or simply print new money to finance the Treasury Dept.'s funding needs, if necessary.
I think that, in 2009-2010, it will pay to invest under the assumption that this new government spending will debase the US Dollar – the world's reserve currency and thus lynchpin of its financial system – at an accelerating rate. I suggest you beat the rush to inflation hedges led by Gold Bullion and oil today.
With deflation fears running wild, few economists are writing about the integrity of the US Dollar as opposed to the "threat" of the currency actually gaining in real purchasing power. But economist who's widely considered to be an expert in financial and currency crises, Willem Buiter, just wrote an excellent post on his Financial Times blog.
In short, Buiter details the most destructive element of Keynesian economic policies: Constantly putting off to tomorrow painful adjustments needed today, and thus trying to "fix" the business cycle now.
The idea of "stimulating" the economy as if it were a machine is shortsighted and ignores consequences. It short-circuits adjustments that are necessary for an economy to become more competitive and efficient. It also diverts scarce capital and resources from the private to the public sector.
But you can imagine how politicians latch onto the Keynesian ethos of "have your cake and eat it too", with the ability to pay with a promise of future taxes levied on those who do not vote in the next election.
You don't have to be a recipient of the Fields Medal in mathematics to figure out that Keynesian economic policies cannot work in the long run; a working knowledge of compound interest will do. In academia, Keynesian policies work; in the real world, they do not. Taxes can simply not be raised high enough to repay debts. Currency debasement will fill the gap.
For Keynesian policies to avoid risking destruction of the currency (or inflation), one would have to assume that future politicians would have the guts and the character to tell voters that they're going to raise taxes and cut government spending dramatically when times are good to pay down the debts incurred during the stimulus.
Some may consider it a fraud on future generations (I do); others may consider it "stimulus". But in today's climate of fear, it doesn't really matter what individuals think. The consequences of letting the deleveraging process feed on itself may lead to a sharp, painful depression, and that is politically unacceptable. So we're going to have our "fix" in the form of deficits and bailouts, rather than going "cold turkey" to use the debt addiction/drug addiction analogy. After all, most of our elected leaders have been taught in school that the New Deal "saved" us from the Great Depression.
Any "solution" to this crisis will be highly inflationary, and I think Gold Investment (as well as Gold Mining stocks) are beginning to anticipate this.
Taxes simply cannot be raised enough to pay for these bailouts. Fundamentally, this is a problem of old paper (debt) that will be addressed with new paper (currency). We likely won't see new credit growth in most areas of the economy, but at the very least, the Fed and Treasury can use deficits and the printing press to stop the highly destructive process of credit contraction. Flattening the downward trajectory of system-wide credit would do a lot to restore confidence.
The inflationary endgame is even spreading to former safe haven currencies. The Swiss are looking to debase their currency to cushion their banking sector. This may mark an end to the popular notion that one paper currency should be viewed as a safe haven from another; they all should keep going down in value compared with gold. Yesterday's issue of The Gartman Letter explains:
"The [US Dollar's] movement against the Swiss franc is most unusual, but it is rather fundamentally warranted in light of statements made yesterday by Mr. Philipp Hildebrand, the Swiss National Bank's vice chairman, and the gentleman usually called upon to make official statements regarding bank policies...
"Mr. Hildebrand made it very, very clear that the SNB is joining the Fed and the Bank of England in making quite certain that more-than-ample supplies of liquidity will be made available to the market, and that the bank is prepared to do what it must do...including buying government and even corporate debt securities for its own account if that must be done...
"At this point, we must reiterate the comments made by Mr. Hildebrand, the vice chairman of the Swiss National Bank. If the SNB is now embarking...or is prepared to embark...upon a tacit devaluation of the Swiss Franc, those who had owned the [Franc] as a 'hedge' against currency weakness in the US and elsewhere and who had owned the franc as a refuge will turn to gold instead. It is the logical substitution.
"What Mr. Hildebrand has said is the singularly [most] bullish comment on gold we can recall."
Buy Gold, in short...or keep Buying Gold if you're already in. That's The Gartman Letter's take. Or if you want to swing a bigger bat, with more risk and leverage, buy call options on the GDX Gold Mining stock index. That's our guess.